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Home equity loans and lines of credit are ways to use the value in your home to borrow money. Learn about the different options, the benefits, and the risks of each.

Using the Equity in Your Home To Borrow Money

Your equity is the difference between what you owe on your mortgage and the current value of your home or how much money you could get for your home if you sold it.

Taking out a home equity loan or getting a home equity line of credit (HELOC) are common ways people use the equity in their home to borrow money. If you do this, you’re using your home as collateral to borrow money. This means if you don’t repay the outstanding balance, the lender can take your home as payment for your debt.

As with other mortgages, you’ll pay interest and fees on a home equity loan or HELOC. Whether you choose a home equity loan or a HELOC, the amount you can borrow and your interest rate will depend on several things, including your income, your credit history, and the market value of your home.

Talk to an attorney, financial advisor, or someone else you trust before you make any decisions.

Home Equity Loans Explained

A home equity loan — sometimes called a second mortgage — is a loan that’s secured by your home.  

Home equity loans typically have a fixed annual percentage rate (APR). The APR includes interest and other credit costs.

You get the loan for a specific amount of money and usually get the money as a lump sum upfront. Many lenders prefer that you borrow no more than 80 percent of the equity in your home. 

You typically repay the loan with equal monthly payments over a fixed term.

But if you choose an interest-only loan, your monthly payments go toward paying the interest you owe. You’re not paying down any of the principal. And you usually have a lump-sum or balloon payment due at the end of the loan. The balloon payment is often large because it includes the unpaid principal balance and any remaining interest due. People may need a new loan to pay off the balloon payment over time.

If you don’t repay the loan as agreed, your lender can foreclose on your home.

For tips on choosing a home equity loan, read Shopping for a Mortgage FAQs.

Home Equity Lines of Credit Explained

A home equity line of credit or HELOC, is a revolving line of credit, similar to a credit card, except it’s secured by your home.

These credit lines typically have a variable APR. The APR is based on interest alone. It doesn’t include costs like points and other financing charges.

The lender approves you for up to a certain amount of credit. Because a HELOC is a line of credit, you make payments only on the amount you borrow — not the full amount available.

Many HELOCs have an initial period, called a draw period, when you can borrow from the account. You can access the money by writing a check, making a withdrawal from your account online, or using a credit card connected to the account.  During the draw period, you may only have to pay the interest on money you borrowed.

After the draw period ends, you enter the repayment period. During the repayment period, you can't borrow any more money. And you must start repaying the amount due — either the entire outstanding balance or through payments over time. If you don’t repay the line of credit as agreed, your lender can foreclose on your home.

Lenders must disclose the costs and terms of a HELOC.  In most cases, they must do so when they give you an application. By law, a lender must:

  1. Disclose the APR.
  2. Give you the payment terms and tell you about differences during the draw period and the repayment period.
  3. Tell you the creditor’s charges to open, use, or maintain the account. For example, an application fee, annual fee, or transaction fee.
  4. Disclose additional charges by other companies to open the line of credit. For example, an appraisal fee, fee to get a credit report, or attorneys’ fees.
  5. Tell you about any variable interest rate.
  6. Give you a brochure describing the general features of HELOCs.

The lender also must give you additional information at opening of the HELOC or before the first transaction on the account.

For more on choosing a HELOC, read What You Should Know About Home Equity Lines of Credit (HELOC).

Closing on a Home Equity Loan or HELOC

Before you sign the loan closing papers, read them carefully. If the financing isn’t what you expected or wanted, don’t sign. Negotiate changes or reject the offer.

If you decide not to take a HELOC because of a change in terms from what was disclosed, such as the payment terms, fees imposed, or APR, the lender must return all the fees you paid in connection with the application, like fees for getting a copy of your credit report or an appraisal.

Avoid Mortgage Closing Scams

You could get an email, supposedly from your loan officer or other real estate professional, that says there’s been a last-minute change. They might ask you to wire the money to cover your closing costs to a different account. Don’t wire money in response to an unexpected email. It’s a scam. If you get an email like this, contact your lender, broker, or real estate professional at a number or email address that you know is real and tell them about it. Scammers often ask you to pay in ways that make it hard to get your money back. No matter how you paid a scammer, the sooner you act, the better.

Your Right To Cancel

The three-day cancellation rule says you can cancel a home equity loan or a HELOC within three business days for any reason and without penalty if you’re using your main residence as collateral. That could be a house, condominium, mobile home, or houseboat. The right to cancel does not apply to a vacation or second home.

And there are exceptions to the rule, even if you are using your home for collateral. The rule does not apply

  • when you apply for a loan to buy or build your main residence
  • when you refinance your mortgage with your current lender and don’t borrow more money
  • when a state agency is the lender

In these situations, you may have other cancellation rights under state or local law.

Waiving Your Right To Cancel

This right to cancel within three days gives you time to think about putting your home up as collateral for the financing to help you avoid losing your home to foreclosure. But if you have a personal financial emergency, like damage to your home from a storm or other natural disaster, you can get the money sooner by waiving your right to cancel and eliminating the three-day waiting period. Just be sure that’s what you want before you waive this important protection against the loss of your home.

To waive your right to cancel:

  • You must give the lender a written statement describing the emergency and stating that you are waiving your right to cancel.
  • The statement must be dated and signed by you and anyone else who also owns the home.

Cancellation Deadline

You have until midnight of the third business day to cancel your financing. Business days include Saturdays but don’t include Sundays or legal public holidays.

For a home equity loan, the clock starts ticking on the first business day after three things happen:

  1. You sign the loan closing documents;
  2. You get a Truth in Lending disclosure. It outlines key information about the terms of the loan, including the APR, finance charge, amount financed, and payment schedule; and
  3. You get two copies of a Truth in Lending notice explaining your right to cancel the contract.

If you close on a Friday and get the disclosure and two copies of the right to cancel notice at your closing, you have until midnight on Tuesday to cancel.

For a HELOC, the three business days usually starts to run from when you open the plan, or when you receive all material disclosures, whichever occurs last.

If you didn’t get the disclosure form or the two copies of the notice — or if the disclosure or notice was incorrect — you may have up to three years to cancel.

How To Cancel

If you decide to cancel, you must inform the lender in writing. You may not cancel by phone or in a face-to-face conversation with the lender. Mail or deliver your written notice before midnight of the third business day.

After the lender gets your request to cancel, it has 20 days to

  1. return any money you paid, including the finance charge and other charges like application fees, appraisal fees, or title search fees, and
  2. release its interest in your home as collateral

If you got money or property from the lender, you can keep it until the lender shows that your home is no longer being used as collateral and returns any money you’ve paid. Then you must offer to return the lender’s money or property. If the lender doesn’t claim the money or property within 20 days, you can keep it.

Your Rights After Accepting a HELOC

In a HELOC, if you make your payments as agreed, the lender

  • may not close your account
  • may not demand that you speed up payment of your outstanding balance
  • may not change the terms of your account

The lender may stop credit advances on your account during any period in which interest rates exceed the maximum rate stated in your agreement, depending on what your contract says.

The lender may freeze or reduce your line of credit in certain situations. For example,

  • if the value of the home declines significantly below the appraised amount
  • if the lender reasonably believes you will be unable to make your payments due to a material change in your financial circumstances

If any of these things happen and the lender freezes or reduces your line of credit, your options include

  • talking with them about restoring your line of credit
  • getting another line of credit
  • shopping around for another mortgage and paying off the first line of credit

Report Fraud

If you think your lender has violated the law, you may want to contact the lender or servicer to let them know. At the same time, you also may want to contact an attorney. Then report it to